Wednesday, October 14, 2009

In which I stomp on Scott Lonklin's stompage of Yahoo Finance

"Dear America: you can’t have an economy based on narcissism, good intentions, marketing, catering to rich bored people, really excellent webpages, and selling underpants on the internet. I’m afraid you’ll have to make something of value."

Well, actually, you can. Scott, like many people, doesn't seem to understand what business, entrepreneurship, and wealth creation are really about. They are not about innovation or creating the latest and greatest thing, at least not necessarily. Great fortunes have been built on very prosaic foundations. The capital that funded the industrialization of the United States of America was built by simply moving things from A to B. In fact, most of the world's great fortunes have been built not by innovation, but by incremental improvements in efficiency of a small number of basic processes. Companies built on breakthrough technologies like Google and Microsoft are the exceptions (that's why they make the papers). And even Google actually makes its money through a prosaic mechanism: advertising. They make nearly nothing from search directly.

Of course, all else being equal, innovation can help you achieve a competitive advantage. But innovation is not free. It merely one among the many costs of bringing a product to market. A myopic focus on innovation can result in spending too many resources on it to the detriment of other more important things, and ultimately making yourself non-competitive, or worse, non-profitable. The ultimate measure of success in business is not whether you've done something new and cool, but merely if you've provided a useful good or service better than your competitors, where "better" is judged by the market. And that means that the quality metric is complicated and multi-dimensional. It varies according to place and time. Two days ago we paid $100 for dinner for two. Was it worth it? We could have sated ourselves at McDonald's for 1/10th the price. But then we would have been eating burgers instead of kung pao chicken, and looking at Ronald McDonald (I presume) instead of the Shanghai skyline. Is that worth $90? We certainly thought so at the time.

So can you have an economy based on catering to rich bored people? Or selling underpants on the Internet? You certainly can, if there are enough rich bored people willing to pay to have help alleviating their boredom, or enough people for whom buying underpants on the Internet is more convenient than shlepping out to the store. I'd buy underpants on the Internet. Jeff Bezos got rich selling books on the Internet. Why not underpants?

The vast majority of people's needs are prosaic: food, clothing (including underpants), shelter, and, if you can afford it, entertainment. You don't have to discover new laws of physics to find ways of delivering these needs to a segment of the market better than the people who are currently doing it -- by whatever quality metric that market segment chooses to apply. Lower the price. Make it more reliable. Get it there faster. Offer more variety. Make it more fashionable. All of these are ways of providing more value. Hardly any of them require a lot of innovation.

This is why I am fundamentally optimistic about the future. We have barely begun to scratch the surface of the potential of the Internet to provide incremental value, and thus produce wealth, in traditional industries. This is because technology geeks are at best ignoring, and at worst outright snubbing, prosaic industries like renting airplanes, catering to rich bored people, marketing, and selling underpants or used cardboard boxes.